War and conflict: What are the impacts on accounting for investees?

3 May 2022 (updated 31 October 2023)

 

Global IFRS Institute | Uncertain times

War or conflict between countries or territories may lead to changes in investors’ relationships with investees (i.e. subsidiaries, associates and joint ventures) in the countries or territories affected. For example, due to war or conflict, foreign investors may:

• decide to cease operations in these markets or may be required to do so because of sanctions imposed;
• face difficulties in repatriating funds from investees in the affected countries or territories; and
• be impacted by potential new restrictions imposed on foreign owners – e.g. nationalisation of local operations.

Under the continuous assessment provisions in IFRS^® Accounting Standards, an investor should consider whether changes in the environment affect its ability to control, jointly control, or have significant influence over each of its investees and should account for each investment accordingly. Irrespective of whether there is a loss of control, joint control or significant influence, there may be other impacts to consider – e.g. possible impairment and presentation as held-for-sale or discontinued operations.

Should subsidiaries continue to be consolidated under IFRS 10?

Under IFRS 10 Consolidated Financial Statements, an investor controls a subsidiary when three key elements are met:

• power over the investee;
• exposure, or rights, to variable returns; and
• the ability to use its power to affect its returns.

An investor is required to reassess whether it has control whenever there are changes to one or more of these three elements. The hurdle for losing control of an existing subsidiary is generally high and deconsolidation of subsidiaries in the war or conflict-affected countries, territories or regions should not be immediately presumed. For example, there is no exclusion from consolidation due to difficulties in repatriating funds from the subsidiary to the parent or lack of exchangeability of currencies.

When assessing power over the investee, an investor considers only substantive rights relating to an investee – i.e. rights that it has the practical ability to exercise. Legal or regulatory requirements that prevent the holder from exercising its rights (e.g. where a foreign investor is prohibited from exercising its rights) should also be considered. However, if restrictions are only operational limitations in executing the decisions made by the investor, the investor might still have substantive rights and would continue to have power.

When assessing returns, an investor evaluates if it is exposed, or has rights, to variable returns from its involvement with an investee. The sources of returns are very broad and include both positive and negative returns. For example, negative returns might exist through holding 100 per cent shares, loan receivables and other contractual and non-contractual involvement. IFRS 10 does not establish a minimum level of exposure to returns to have control. [IFRS 10.15]

 

Does joint control or significant influence continue to exist?

Similar to the evaluation for subsidiaries under IFRS 10, investors need to assess whether joint control or significant influence continues to exist under IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures, respectively.

Joint control only exists when unanimous consent is required to make decisions about relevant activities. If facts and circumstances change, an investor should reassess whether it still has joint control. An investor loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee, independently of whether a change in ownership levels has occurred. For example, this may occur if the investee becomes subject to the control of a government, court, administrator, or regulator. [IAS 28.9]

When an investment ceases to be an associate or joint venture, the investor stops accounting for the investee based on the equity method and instead accounts for its investment as a financial asset in accordance with IFRS 9 Financial Instruments. The fair value of the investment at the date on which it ceases to be an associate or a joint venture is regarded as its fair value on initial recognition as a financial asset. [IAS 28.22]

 

Other possible impacts to consider

An investor may also need to assess whether its investments are impaired. For more information see our article on the impact of war or conflict on impairment of non-financial assets.

Irrespective of whether there is a loss of control, joint control, or significant influence over an investee, investors may need to assess whether IFRS 5 Non-current Assets Held for Sale and Discontinued Operations applies to its investment in the investee (or a portion of it) that meets the criteria in that standard (e.g. this may be relevant where an investor has decided to dispose of or abandon certain assets or operations).

 

Disclosures

An investor should disclose the significant judgements and assumptions it has made to determine whether it has control, joint control or significant influence over each of its investees that are impacted. IFRS Accounting Standards require investors to disclose the nature and extent of significant restrictions on their ability to access or use the assets and settle the liabilities of the group – e.g. statutory, contractual and regulatory restrictions. [IFRS 12.7, 13]

• Closely monitor the war or conflict and assess the specific facts and circumstances for each investee that may be impacted.
• Consider whether there is a need to reassess the accounting for investees.
  • Has there been a change in any of the three key elements of control – i.e. power, variability and linkage?
  • Has joint control or significant influence been lost?
  • Have other possible impacts (e.g. possible impairment and presentation as held-for-sale or discontinued operations) been appropriately considered?
• Consider whether disclosures sufficiently explain the key judgements made.

KPMG International

Contact